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Why you shouldn’t bet on a Montreal housing bubble

Published on January 11, 2018 in the Financial Post

The Haider-Moranis Bulletin: Montreal’s housing market is booming, but there are a few reasons to be skeptical the city is headed down the path of Toronto and Vancouver

Earlier this week, final numbers were released on the Montreal housing market for 2017, and unlike Vancouver and Toronto, Canada’s second-largest city posted strong gains in sales.

No fewer than 44,448 housing units transacted in the Greater Montreal Area in 2017, an eight per cent increase over 2016. At the same time, housing prices increased by 6 per cent year-over-year to reach $364,500. At $467,500, housing prices on the Island of Montreal were significantly higher than the suburbs. (Still, compared to Toronto and Vancouver, housing prices in Montreal seem like a bargain.)

While single-family homes registered a three per cent increase in sales, condominium sales were up by 17 per cent in the Montreal region. In December alone, condo sales were up by 35 per cent.

Those robust housing returns have fuelled a sense of optimism, with some industry watchers in Quebec eager to proclaim that the housing market is on fire.

The newfound exuberance has also raised concerns about possible government intervention, like the foreign homebuyers’ taxes in Toronto and Vancouver, to guard against the housing price inflation in the future.

There are, however, a number of reasons to be skeptical that Montreal is indeed headed down the path of extreme housing price growth that has gripped the Vancouver and Toronto markets.

MODEST GAINS
One reason that fears of price inflation are largely exaggerated is because Montreal’s gains so far have been relatively modest, and come after decades of muted growth.

Concern about the influence of foreign buyers also appears to be exaggerated, despite stronger sales in the high-end market.

In 2017, sales of homes over a million dollars were up by 20 per cent, and condominiums over half a million dollars reported a 42 per cent increase.

While the share of non-resident owned properties increased significantly from the level in 2016, Canada Mortgage and Housing Corporation reported that the difference in asking and sold prices were the same for foreign and domestic owners in Montreal, suggesting their impact on prices overall were not as great.

Housing starts are another reason to be skeptical of a bubble.

Unlike Toronto and Vancouver, where construction of new housing slowed down in 2017, Montreal experienced a big jump in housing starts that is likely to mediate housing price increases in the future. Last year, construction commenced on 24,756 housing units in the Montreal Census Metropolitan Area. Most of those units were condominiums.

Then there is the fact that the most distinguishing features of Montreal’s housing market — tenure and structure — also work against the potential for a bubble.

RENTALS
The city of Montreal proper is a city of renters where two-thirds of the households rent. Furthermore, apartments (including condominiums) account for 86 per cent of the housing stock.

Condominiums are smaller in size and are therefore relatively cheaper to own or rent. Households living in condominiums or apartments are also relatively smaller in size. The 2016 Census revealed that renters in Montreal, on average, spent $835 on housing-related costs that included rent and utilities.

With a majority of the housing stock in Montreal being apartments or condominiums and 59 per cent of the households being single-person households or couples without children, the prospects for a rapid increase in housing prices in Montreal are rather farfetched: Rental units and smaller-sized households are not the usual suspects for creating housing bubbles.

That said, the robust performance of housing markets in December is good news for Montreal. For decades, city’s housing market trailed behind those in Toronto and Vancouver. Even urban housing markets in Alberta accelerated at faster rates than Montreal when crude prices were high.

Instead of imposing new taxes, Montreal should focus on increasing the supply of housing to keep prices in check. One of new mayor’s campaign promises was to compel developers to set aside 40 per cent of the units in a new development for social and affordable housing. Developments with fewer than 50 units would have the option to contribute to a housing fund instead.

Plante may want to revisit her plans to increase affordable housing in Montreal. She is on the right track by focusing on housing supply. A less prescriptive approach to new housing developments is likely to increase the supply of regular and affordable housing.